Covid19 and how it affects your taxes
When the coronavirus pandemic began severely taking its toll last March, many employers switched to a work-from-home model. As a result, many employees were working in a state other than the one their office was located in. This raised the issue of determining which state is owed income taxes. In order to best understand the situation, one must first distinguish between domicile and residence.
While the terms “domicile” and “residence” appear to be synonymous, they have different meanings for tax purposes. A domicile is the location of one’s true home. One can only have one domicile at a time, and can only establish a new one with clear and convincing evidence. One’s intent plays a large part in determining what his true home is. The size, value, and use point to which home is true. Additionally, the home in which one spends majority of his time and has his near and dear items and family members will be considered his domicile. Another important factor is where his active business involvement is, either the location of his employment or active participation in a business.
For tax purposes, most states consider a person a statutory resident even if his domicile is in another state, if he maintains a permanent place of abode in a state and spends at least 184 days there at any point during the year. This status is as opposed to a nonresident, who does not fall into the category of statutory resident or domicile. A nonresident is only subject to tax on income earned in that state; for example, rental income from owning tangible property in the state, income from business in the state, or wages from being employee in the state. In addition, flow through income from a company that does business in a state is subject to income tax in that state.
To illustrate in the context of Covid-19, take the example of Josh who leaves his NYC apartment in March and moves to a much larger vacation home in East Hampton, NY. He now works remotely, and does not plan to move back to NYC until there is an effective vaccine. If the world returns to pre-Covid normalcy within the next 18-24 months, it is unlikely that he will be successful in changing his domicile even if he gets a new license and votes in his vacation home. He does not meet the requirements mentioned above regarding establishing a domicile, mainly because his move is temporary and he intends to move back once the pandemic is over.
A growing minority of states currently utilize rules regarding convenience of the employer, complicating matters further. If an employee decides to work from home in another state due to his own preference or convenience, such compensation is treated as earned in the employer’s state, and the employee will be taxed there as well as his home state. However, if an employee is working from home at the employer’s command, he will only be subject to income tax in his home state. Although many states do allow residents a credit for taxes paid to other states, an employee will end up paying the amount of the higher state tax if he chooses to work from home for his own convenience.
Income tax laws, specifically for NYS and NYC, are highly complex and must be evaluated on a case by case basis. Amid the coronavirus pandemic, many people have relocated temporarily, but do not have strong enough cases for changing their domicile for tax purposes. The threshold of what is considered clear and convincing is significantly higher now, as there are many people in this situation and states want to make sure they are collecting every penny they are owed. As a result, the risk of audit is higher, so this is not a matter to treat lightly.